Estate planning: Consider a life estate deed
Feb 2017
A life estate is a way to transfer real estate to beneficiaries during your lifetime but still retain the right to use and/or live on the property for the remainder of your life. It’s a quick and simple process, providing tax advantages, as well as a means to avoid probate on the real estate.
With a life estate, there are two types of property owners. There is the life tenant, who has the exclusive right to use the property during their lifetime. The life tenant can be a sole owner, or sometimes a joint life tenant, such as husband and wife. The life tenant has the responsibility to maintain the property, as well as to pay for the taxes and insurance. There is also the remainderman, who has the exclusive ownership rights and responsibilities upon the death of the life tenant(s).
Life estates are easy and inexpensive to accomplish. Upon the death of the life tenant(s), full ownership automatically transfers to the remainderman, without having to go through a probate or the court. When the remainderman takes full ownership, there is a full step up in basis, which provides capital gain tax advantages to the remainderman.
If a property is sold when there is a life tenant, both the life tenant and the remainderman have to approve the sale and sign. The life tenant loses the authority and control to sell alone. If both agree, and a sale occurs, the life tenant is entitled to a percentage of the sale proceeds (dependent on life tenant’s age) and the remainderman is entitled to a percentage of proceeds. This might be a problem for the life tenant if he or she is receiving, or planning to qualify for, Medicaid benefits. Without proper planning, the sale proceeds would need to be spent down on the cost of care.
In the past, life estates were a means to protect real estate from potential long-term care costs, without losing the control over the real estate during your lifetime. If five years lapsed after the transfer date, before applying for Medicaid, the property was protected from the cost of care. When applying for Medicaid for long-term care costs, the state does not count a life estate as an available asset. However, all life estates created on or after Aug. 1, 2014, are now subject to estate recovery. This means that upon the death of a person receiving Medicaid benefits, the Wisconsin Estate Recovery Program will now recover a percentage of the value of the life estate property, the percentage determined by the age of the Medicaid recipient at the time of death. Therefore, a life estate deed is not the best way to preserve real estate from the cost of potential long-term care.
Life estates are not for everyone. There are advantages and disadvantages, all of which should be discussed with an estate planning attorney to determine the best means to accomplish your goals.
Carissa Giebel is an estate planning attorney and partner at Legacy Law Group LLC. She can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it., www.legacylawllc.com or (920) 560-4651.
